Monday, 23 January 2012

Africa: the next big investment story


Welcome to Africa, the Dark Continent with a bright future. Just a short decade ago, Africa was the “hopeless continent.”  However, it has turned the corner and is now “the hopeful continent.” And given the state of things, such bold statements about the continent are likely to become common place. It is the next big investment story. Some analaysts call it the " final frontier."

 What has happened? How did Africa turn its fortunes so fast?  Four things happened. No. five namely:  Africa’s isolation; the rise in commodity prices; good house keeping; Economic growth and the entry of China as an investor in the continent. And finally, frequent economic meltdowns in the North.

Africa has a low correlation with the global economy. Consequently, the continent is not significantly affected by economic crises in the north. In the last decade or so Africa has shrugged off three global economic meltdowns that devastated the rest of the world.

In 1997, Africa shrugged off the financial market meltdown that devastated financial markets in Asia, Europe and the USA. Four years later in 2001, the continent again escaped the dotcom meltdown unscathed.

The dotcom meltdown was in fact a blessing in disguise for Africa. Small homebred ICT companies exploited the opportunity to grow into Mega corps. Today, Africa’s largest cellular phone companies were brewed in Africa. According to GSM association, there were 650 million subscribers in Africa by the end of 2011 and the number is expected to grow to 735 million by the end of 2012. This is a 64 per cent penetration rate, perhaps as high as in the North if not higher. 

This huge number is shared among three largest homebred Mobile providers and their smaller relatives. The largest of these is South Africa’s MTN which has grown into a Trans-national Corporation, controlling more than 150 million subscribers in Africa, Middle East and East Asia in just about 15 years. Egypt’s Orascom is second and then in third place is a company that keeps changing hands, now Airtel. Airtel was originally a homebred Company known as Celtel with a foot print in 15 African countries.  Europe’s Vodafone and Orange have some presence in Africa but probably are not among the top five players in the continent.

The second reason: economic growth. Over the past decade six of the world’s ten fastest-growing countries were African, says the Economist. “In eight of the past ten years, Africa has grown faster than East Asia, including Japan. This growth has added another 60 million to Africa’s middle class whose per capita is $3,000. This number is expected to rise to 100 million in 2015, says the Economist. Other analysts say that many countries in the continent will post 7 per cent growth rates into the future.

The commodities boom is partly responsible. In 2000-08 around a quarter of Africa’s growth came from higher revenues from natural resources.  Other factors include the growth of local enterprises which reduced profit repatriation. Africa has witnessed a rapid growth of highly profitable local enterprises, spread across all sectors, which boosted employment, tax revenue collection and domestic investment as they invested in further growth.  

Governments too have put their houses in order thus reducing wastage of public resources. This resulted in huge investments in infrastructure - roads, rails, Hydro-electric dams, name them. Infrastructure has been the Achilles heel in Africa’s progress. So the rapid investment in infrastructure has improved the quality of life for African by; cutting the cost of doing business, opened up some areas for exploitation and created millions of new jobs.  Almost every country in Africa is now engaged in Major infrastructure project be it roads, railways, airports, hydro dams geothermal projects.

In East Africa, the trend is to build roads Airports and Railways lines almost simultaneously. Tanzania, Uganda and Burundi are jointly sourcing for funds to build a railway line connecting Tanzania’s Port of Tanga in the Indian Ocean to Musoma on Lake Victoria, some 880KM, inland. The US$4.7 billion line will serve landlocked Rwanda, Burundi and Uganda.

Next door, Kenya has finalized feasibility study for the construction of Port of Lamu and more than 1000KM Standard Gauge Railway line connecting the Port with Juba in landlocked South Sudan. The entire project will cost an estimated US$8.1 billion. A 1500 KM oil Pipeline from South Sudan to Lamu Port which has been in the drawing board for a long time, now looks feasible.
 Further North, Ethiopia is also going full steam building a 659 KM Railway line Connecting Addis- Ababa with the port of Djibouti on the Red sea. Ethiopia, Jointly with Kenya have just acquired US$360 million funding from African development Bank to Build a 320 KM road linking the two countries.

Joint Application for funds to build infrastructure projects of mutual benefit, is hastening infrastructure development in Africa.  It is also opening up trade links in the continent. Intra-Africa trade, though still a small proportion, compared to trade between Africa and the world is picking up. Trade within the East Africa common market region has already hit US$2.5 billion a year and is growing.

In its drive to develop infrastructure, African governments are becoming focused and impatient with laggards. In fact, the largest financiers of the on-going projects are China and African Development Bank. The north is increasingly being replaced- mainly because of the slow –decision making habits.

Infrastructure development has the greatest investment potential in Africa. Demand for infrastructure is very high, way beyond the governments’ ability to provide leading a paradigm shift to include the private sector in Infrastructure development. So far, only the telecommunications sector is largely in private hands. And their earnings are mouth watering.
 Studies show that other infrastructure sectors are also profitable with IRRs ranging between 16 percent and 25 percent. Capital markets in Africa are vibrant and sufficiently sophisticated to mobilize funds for infrastructure projects. Funds managers out there are you listening?


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